OSB Group Plc (OSB) Earnings Call Transcript & Summary

Good morning, everyone, and happy St. Patrick's Day to you. And thank you, as always, for dialing into our 2021 Full Year Results Presentation Results, which one analyst this morning described as astonishing. So I was clearly quite happy with that. Over the years, I seem to have had the misfortune coupled with the immense learning experience of running banking businesses through a global financial crisis, a protracted exit of the U.K. from the EU, an unprecedented global pandemic that seemingly brought most of the world to a stop. And now, we're in the midst of an extremely difficult geopolitical crisis and all the knock-on short-term inflationary pressures that brings as well, of course, as the horrendous situation for the people of Ukraine, to whom I'm sure all of our hearts go out. Each time one of these known unknowns occurs, financial markets generally get concerned. However, despite these challenges over the years and the difficulties of the pandemic that pervaded throughout the reporting period, the OSB business model remains resilient. And in fact, 2021 was a standout year for the OSB Group, in which we delivered record underlying profit before tax supported by exceptionally strong operating metrics. We worked hard to help borrowers facing financial difficulty through cautious exiting of repayment holidays and working with borrowers coming off furlough as the support scheme ended in October '21. The results were encouraging with 3-months plus arrears broadly stable at 1.1%. Our CET1 ratio strengthened further during the year to 19.6%, demonstrating the significant capital generation capability of the bank's balance sheet and business model. And I'm delighted to say that we will now commence a share buyback program of GBP 100 million, coupled with an increase to our dividend payout ratio, demonstrating the strength of our capital position and disciplined approach to capital management. April will provide some more color on this a little bit later. Our ESG agenda is progressing well. I'm really pleased that we have set clear and stretching targets for ourselves, both in terms of operational but also financed emissions. We signed up to the Net Zero Banking Alliance to ensure that the group is positioned inside the tent on how to leverage best practice and achieve this as quickly as possible. And finally, in this brief introduction, whilst we are clearly cognizant of the uncertainty driven by the geopolitical pressure on the economic outlook, our guidance for 2022 remains strong. We expect to deliver net loan book growth of circa 10% again this year, with NIM broadly flat to 2021. And we expect cost-to-income ratio to increase marginally in 2022 to reflect a return to more normalized working practices and continued investment in our risk and business management capability. As a brief reminder of some of our core strengths, our specialist multi-brand lending franchise has again delivered the growth aspiration we set out for the group. And the net loan book now stands at GBP 20.9 billion, up 10% from the prior year. Our sophisticated funding platform has performed well during the year, attracting circa GBP 1 billion of new retail deposits, combined with now 21 securitizations to date across the group, totaling GBP 9.8 billion. And our unique operating model continues to serve the group well, delivering high Net Promoter Scores and contributing to our class-leading cost-to-income ratio of 24%. Despite the competitive landscape in our core specialist lending segments, our proposition from rapid decision off-the-peg loans delivered through our digital platform in our Precise brand through more tailored and up to fully bespoke in our Kent and InterBay brands continues to provide that one-stop shop for brokers and offering a breadth and expertise and convenience that most of our competitors simply can't match. This slide contains our statutory financial highlights. However, I will run through our underlying financial highlights before handing over to April to talk you through the results in more depth. Our gross lending was up 20% in the year, resulting in that net loan book growth of 10% as guided. Our NIM improved by 35 basis points to 282 basis points, and our loan loss ratio reduced by 40 basis points. Our cost-to-income ratio was extremely low at 24%, although 2021 investment was, of course, impacted by the pandemic as well as delays in hiring new and replacement staff in an exceptionally tight labor market. And our ROE improved by 5 percentage points to 24%, delivering an improvement in PBT, up 51% to a very healthy GBP 522 million. This resulted in an improved basic EPS for shareholders of 86.7p, up 49% on the prior year. April, I'll now hand over to you.

Thank you very much, Andy, and good morning, everyone. So I'm delighted that we delivered an exceptionally strong underlying ROE, as Andy mentioned, of 24% for 2021. Our profitability strengthened significantly with underlying profit before tax increasing by 51% to GBP 522 million, a record result for the group. In fact, it's a record even if you exclude the impact of impairment provisions. We grew underlying net interest income by 22% and delivered a strengthened net interest margin of 282 basis points, up 35 bps on the prior year, and that was primarily due to a lower cost of retail funds. More on that a bit later. Our efficiency metrics remain very strong with our underlying cost-to-income ratio improving further to 24% due to higher total income. This is consistent with our stable underlying management expense ratio which is OpEx as a percentage of total assets, which remains at 70 basis points. The management expense ratios in both 2020 and 2021 benefited from the delivery of cost synergies as well as lower spending as a result of the lockdowns, the working-from-home guidance and, as Andy mentioned, some delays in hiring in an increasingly competitive labor market. Looking ahead to 2022, we expect the underlying cost-to-income ratio to increase marginally as the ratio in 2021 benefited from both fair value gains from hedging activities and the reduced spend I just mentioned. There's clearly potential for some additional reinflationary headwinds. However, we will continue our strong focus on cost discipline and efficiency. The underlying loan loss ratio improved significantly in 2021 to a credit of 2 basis points due to the improving outlook, and I'll walk you through this in more detail on a later slide. Turning to the income statement. I would like to highlight a couple of significant movements in noninterest income. Firstly, those net fair value gains on hedging activities of GBP 18.5 million in 2021. The majority relates to interest rate swaps hedging our mortgage pipeline prior to them being matched against completed mortgages. We recognized a loss in the prior year. We also recognized a gain on sale of financial instruments of just over GBP 2 million, which related to disposal of notes in one of our PMF securitizations in February. This compares to an underlying gain of GBP 33 million from 2 structured asset sales in the prior year. Underlying earnings per share of 86.7p for the year increased by 49% versus the prior period, commensurate with the increase in profit. So turning to the next slide, which summarizes our strong secure balance sheet. We delivered GBP 4.5 billion of gross new lending in 2021, up 20% on the prior year as we returned to pre-pandemic criteria in our core Buy-to-Let and Residential subsegments in the second half. This drove a 10% increase in the net loan book to GBP 20.9 billion at the end of 2021. We remain predominantly retail funded, with diversification provided by Bank of England funding schemes and securitizations. Retail deposits grew by 6% to GBP 17.5 billion as at 31st of December as the group continued to attract new savers. We used the TFSME scheme during the year to completely refinance TFS and extend the duration by another 4 years and also drew down an additional GBP 634 million before the scheme closed in October to help fund net loan book growth. The credit quality of our book remains very strong, with 3-months plus arrears broadly stable at 1.4% for the OSB segment and 0.7% for the CCFS segment. Our loan book is secured at sensible loan to values. The weighted average book loan to value for the group fell to 62% in 2021 from 65% in the prior year, supported by house price appreciation and the new lending LTV also fell to 69% from 70% in the prior year. The next slide shows our net interest margin waterfall where you can see the very simple drivers behind the strength of NIM in 2021. It increased by 35 basis points to 282 bps primarily as a result of a lower cost of retail funds. You'll recall that in 2020, NIM was adversely impacted by delays in passing the base rate rises on to retail savers in full. In 2021, underlying NIM also benefited by 8 basis points due to GBP 18.6 million of underlying net EIR reset gains taken at the end of the year to reflect updated prepayment assumptions on the lending back book based on more recent customer behavior. Looking forward, underlying NIM for 2022 is expected to be broadly flat, as Andy mentioned, to 2021, with observed delays in passing on the recent base rate rises to retail savers expected to broadly offset the impact of those EIR reset gains taken in 2021 and recent market price reductions on new lending. There may well be additional upside from future rate rises to the extent that these are not passed on in full to retail savers. The next slide provides an explanation of the movement in the impairment provision in 2021. Concerns for the economy at the start of the pandemic have not generally materialized and the macroeconomic outlook improved over the course of 2021. House prices appreciated and 3-month plus arrears remain broadly stable. However, concerns started to emerge at the end of the year over the rising cost of living and the impact of this and rising rates could have on affordability. We addressed this concern by increasing our weighting against the 2 downside scenarios by 5 percentage points each. All of these forward-looking macroeconomic factors resulted in a provision release of around GBP 25 million, which you can see in the first green bar in the chart. This release was partially offset by a charge of GBP 4.3 million due to model enhancements and a charge of GBP 6.8 million due to post-model adjustments. During the pandemic, we implemented a number of post-model adjustments to ensure that any risks not captured by our IFRS 9 models were appropriately reflected in provision levels. Other provision increases of GBP 4.3 million, which are net of write-offs, include individually assessed provision increases and methodology enhancements as well as changes in the credit profile of the book such as the portfolio size, the mix and staging mix. You can see that our coverage ratios have reduced in 2021, commensurate with the improved outlook and the house price outperformance. However, they remain significantly higher than pre pandemic. We will obviously continue to proactively review our forward-looking assumptions as the outlook evolves. Turning to our strong capital position. You can see that the group's CET1 and total capital ratio strengthened up to 19.6% and 21.2%, respectively. Going from left to right in the waterfall, which explains the increase in the CET1 ratio, you can see the strong capital generation from profitability. This is partially offset by the foreseeable dividend, which incorporates our recommended payout ratio of 30% for 2021, capital utilized to support balance sheet growth and the dilutive impact as we continue to amortize the fair value uplift on CCFS' net assets combination and the IFRS 9 capital add-backs reduced. The total capital ratio also benefited from the GBP 150 million AT1 issue out of our new holding company in October. Just turning to MREL. We were pleased to receive an extra year to achieve our interim and end-state MREL requirements following the publication of PRA's policy statement in December. We now expect our inaugural issue in early 2023, subject to market conditions. The following slide is a reminder of our existing capital management framework and the actions we have announced this morning. We have a very strong capital position and proven capital generation capability through profitability. This allows us to support both strong growth and the return of capital to shareholders through the GBP 100 million share buyback program and higher dividend payout ratio for 2021 of 30% of underlying earnings. We remain committed to returning any additional excess capital, and we'll update the market once greater clarity is obtained on the impact of Basel 3.1 and its timing versus the group attaining IRB accreditation. The PRA's consultation paper on Basel 3.1 is expected in the second half of this year. Our IRB program made tangible progress during the year. Our end-state IRB models are passing through the final stage of the governance and extensive self-assessment against IRB requirements has been completed and our application documents have been drafted and are going through our internal governance process. The anticipated delay in Basel 3.1 implementation and extension of our MREL deadlines provided us with the opportunity to enhance our level of end-state compliance prior to submitting our Module 1 application, and we continue to engage with the PRA to agree a submission date. I'll now pass back to Andy, who will give an update on our ESG framework and lending and funding franchises. Over to you, Andy.

Thanks, April. At OSB Group, we have really embraced our ESG responsibilities. We recognize that delivery, particularly on climate change, is a journey. However, we've set clear targets and pledged to achieve net zero operating emissions by 2030 and net zero across our business activities by 2050. We've already made sustainable reductions in our own emissions. 10.2% down against the 2019 baseline. We have joined the United Nations Net Zero Banking Alliance to keep on top of evolving legislation and best practice. And I'm delighted to confirm that we have partnered with Natural Capital Partners to provide us access to carbon removal schemes in India, focused on domestic solar energy and sustainable infrastructure as well as supporting sustainable building projects in Malawi, reducing the reliance on traditional clay-fired bricks in favor of materials that do not require firing through traditional fossil fuel methods. These schemes have enabled us to offset both our 2021 and 2020 carbon footprint. Our lending franchise continues to win awards whilst focusing on high credit quality. Average interest coverage ratios for new originations in 2021 were 199% and 188% for OSB and CCFS, respectively. Borrower retention in the year through the OSB Choices program remained excellent at over 70% choosing a new product within 3 months of maturity and professional landlords remained at 82% of the OSB Buy-to-Let completions in 2021. Our funding platform continues to serve us well in the year. Our retail savings strategy of attract, retain and satisfy, saw over 44,000 new savings accounts opened across the group brands, with 90% and 85% retention on maturing deposits in OSB and CCFS, respectively. And those Net Promoter Scores remained best-in-class at over plus 70 in each savings brand. We continue to enjoy TFSME funding during the year and improved our collateral positions further with the Bank of England through leveraging GBP 1.4 billion of retained AAA notes as security rather than rural loans. So in summary, a strong performance across all key metrics in 2021. And as we look forward, of course, we must remain cognizant of the inflationary and geopolitical pressure on the macroeconomic outlook. However, with a healthy pipeline of new business and strong new application flows, we expect to repeat the delivery of 10% net loan book growth in 2021 with a net interest margin broadly flat to last year, with marginal increases in cost-to-income ratio as we continue to invest and return to a more normalized working and expenditure pattern. Finally, I mentioned earlier some of the market shocks that the group has had to navigate through. But throughout each of these, we have consistently delivered strong growth, leading cost management and return metrics, well-managed arrears and overarching credit metrics and strong total shareholder returns. I hope that our 2021 results cement the quality of our business model and the strength of the OSB Group's balance sheet. Thank you all for listening, and Daisy, we will now open up to Q&A.

[Operator Instructions] Our first question is from Benjamin Toms from RBC.

One on NIM, please, and one on costs. So you grew your NIM year-over-year and your guidance for the coming year is for NIM to be broadly flat. If we look at the kind of market available data, it looks like there's spread pressure in Buy-to-Let lending in general. Could you just give some color about why your NIM has been more resilient? Presumably, it's the fact the majority of your book is tailored or bespoke rather than off-the-peg, and that helps you insulate from broader market trends. I don't think you've baked in any rate rise in your guidance, but if you'd give some color on what the upside here might look like if we do get another couple of rate rises from the Bank of England. And now on costs. I think your guidance is for the cost-to-income ratio to increase marginally with the potential for inflationary headwinds. Could you give some color on what kind of movement marginally might look like? Presumably not much more than 1 percentage point. And are your inflationary headwinds that could materialize mostly related to employee wages? Your IRB submission has been pushed back. Is that materially helping the cost line in FY '22? Or is it not that material a development from a cost perspective?

Thanks, Ben. April, are you happy to take those 2?

Yes, sure. I think there were 3 actually maybe.

Yes. I think you're right.

But starting off with the NIM questions. And I think you asked about the pressure on lending. And you're quite right. I mean I think the market has got some competitiveness to it at the moment. I think our most price-sensitive brand is Precise in the CCFS segment. And you're quite right that the sort of more tailored and bespoke nature of our other brands, Kent Reliance and InterBay, respectively, are less price-sensitive. But it's public, have a look at our website. You'll see we have made some price changes this year. But of course, we have also benefited from the lower cost of retail funds as well. But it's something we watch closely. Of course, that takes quite a long time to come through on the net interest margin line given the sheer size of our back book. You're absolutely right as well, but I haven't baked into any -- into my NIM guidance, any future rate rises. I think every time I look at the yield curve, it's changed. I think after every sort of MPC meeting or speech given by one of the members, we've seen tremendous volatility. And therefore, I think it's extraordinarily hard to call or quantify what that impact might be. But certainly, the last 2 base rises, the market, including ourselves, has not only taken a delay in passing it on, which, of course, is beneficial to NIM but also has sought to, I think, take some margin back. And I have no reason to doubt that, that would continue with further rate rises as and when they are announced. But of course, it's not a particularly steep curve, is it? And I think at the moment, it goes up a bit, but then not too long before it starts to trickle down again. So it's something we watch very closely and it's nice potential upside. And I think it allows me to say that although we're guiding NIM broadly flat, I think the outlook is broadly positive. Turning to costs. Yes, marginally, I think we've sort of fairly consistently used that descriptor. But I think there are 2 drivers clearly. So there's clearly a marginal impact, as I mentioned earlier, for the fact that we had that quite large profit, GBP 18.5 million, on our sort of hedging activities. And that arose because the yield curve was broadly steepening between actually hedging our pipeline of mortgages and those mortgages completed, whereas the prior year, it was the other way round. And therefore, it's not something you can really budget for, particularly with such a volatile outlook. So the fact that, that isn't budgeted or guided to recur is a marginal impact. And then the other side, obviously, of the equation is the costs. And we're lucky enough, obviously, sensible to have hedged our energy contracts. So there's some protection there for a period of time. So a lot of our contracts, some of the big IT contracts, of course, have RPI terms in them. So when they get to the end of their sort of typically 1-year term, you can see some inflationary headwinds there. And as you say wage inflation, which is clearly something that everybody is dealing with at the moment in -- particularly in areas where the labor market is very tight due to the supply-demand dynamics. But as I said, I think we've got a particularly good track record, proven track record of doing the best we can by a real understanding of our costs, the real discipline on how we spend money and real efficiencies which I think allow us to, in the past, either grow within sort of the growth in the balance sheet or even at times to deliver some economies of scale as well. So one to watch, I think, and clearly, there will be other opportunities as we go through the year for me to give you an update on that. And then actually IRB, no, because the decision to take the extra time we've been given through the delays to Basel 3.1 actually hasn't impacted what we're delivering in the project. It's all about what stage we actually put in the application document. So there's no impact from an IRB project perspective. The momentum is still firmly going ahead and the decision to take the extra time was really so that we are compliant and operating as an IRB-accredited firm before submitting that Module 1 application. And that really is just to make the best possible use and have the best journey through; best possible use of the PRA's scarce resources, but also have the best possible journey through. So that was the -- that was a little bit more color on that, that final part of your question.

Our next question is from Grace Dargan from Barclays.

A couple from me. So firstly, could you give us a little bit of color around how you've seen buy-to-let volumes since the start of the year? I mean at a system level, it looks like volume's been quite strong driven by remortgaging. I guess is that something that you're seeing in your business? And then secondly, note the commentary on the cost-of-living squeeze impacting the scenario weighting for the impairment. I guess how concerned are you about cost-of-living impact on the buy-to-let mortgage market, both in terms of volumes and policy?

Thanks, Grace. Yes. I mean 2 really good questions. I'll have a stab at handling those. I mean, I think in Buy-to-Let volumes, we said in our presentation voiceover, we are seeing strong application volumes and we are. The remortgage engine, the plethora of a 5-year fixed rate business that was written 5 years ago continues to come up for refinance, and we enjoy that. We are still financing in chunks of existing borrower portfolios as they come up for refinance with other lenders. And actually, we're still seeing purchase activity where landlords are looking to take advantage of stock that they've sort of located that's in their sweet spot for what they want to do. So I'm not suggesting that the market is running hot, but the market is certainly functioning normally in terms of the way that the buy-to-let piece plays out. And of course, mortgages remain incredibly heavily regulated from an owner-occupied perspective. You have to have a fairly chunky deposit. The affordability calculation that's done on a borrower for a residential mortgage is pretty stringent. And as a function of that, people are taking significantly longer to get on the housing ladder and some people never get on the housing ladder. And as the population of the U.K. expands, the private rented sector takes up that slack. You talked about cost-of-living squeeze and are we concerned about the impact. Of course, whenever there is -- or are multiple factors -- sorry, hang on a second. I do apologize, Grace, they were told not to do a fire alarm test today, while I was sat at my desk, but they've just done one. Let's come back on the cost-of-living squeeze. Yes, of course, we look at that. We work with our economic advisers on what might happen in the various scenarios. But I think there are some things that we should think about from an economic backdrop perspective. The U.K. plc public have not spent as much money over the last few years as they historically would have done. I mean a good stat around that is that pre-pandemic, U.K. average 90 million trips abroad. And in 2021, there were only 10 million trips abroad from the U.K. So people clearly haven't been spending the money on the things that they were used to doing. Some of the impact of that, but the result of other reduction in expenditure is that there is GBP 275 billion more in U.K. bank accounts now than there was pre pandemic. That provides a significant buffer against some of those impacts of rising inflation. In terms of lending, we have the lowest loan-to-deposit ratio in the U.K. since the early 1980s. So those days of worrying about significantly wholesale-funded loans and how they might renew are unlikely to come upon us. We're definitely seeing a transition to higher wages. It's happening. Firms are paying much more improved inflationary-type pay rises, which give people some sense of buffer. And of course, that transition to higher wages will last longer than any short-term blip in sort of energy inflation, et cetera. We all know because we keep getting things from our energy providers telling us our direct debits are going up. But what we mustn't forget is that 75% of gas usage in the U.K. is between the months of October and March. So we are nearing a period now of people being able to reduce their expenditure on income. And the other obvious one none of us can escape is when we go and fill the car up for those that don't yet have electric vehicles. But the government do have that on-fuel duty to play with. And if I were a betting man, I'm sure they might be thinking about that in terms of the budget, which would wipe 12.5p off a liter. So I think there's a lot of positive aspects of inflation as well as what the media tells us about the fact that everyone's bills are going up. And we certainly haven't seen evidence of any sort of systemically increasing strain on credit quality as a function of that. But of course, we'll keep it under close monitoring as we normally would.

Our next question is from Edward Firth from KBW.

I just have 2 questions actually. The first one was one of detail really. Stage 3 loans in the second half, they were up by GBP 35 million, GBP 40 million, something like that, which is quite a big chunk in a, I think, you had what, just over GBP 500 million in total. So I just wondered if you could give some sort of guidance as to what's driving that increase and whether you would expect that to continue as we go into this year? That would be the first question. And then the second question, I guess, is a more conceptual question, but about the share buyback because I mean, I guess we don't know exactly what your surplus capital is because there's a lot of moving parts still to come, but you must be making, I don't know, somewhere around the 30% return on equity, maybe more if you were to put sort of normal equity in. And that's in a sector where every other bank I speak to seems to be cheering if they make 10%. And that's like a huge gap. And I suppose what my question is, is why are you returning cash when you can make a 30% return on your incremental money? I mean surely there must be a wealth of opportunity between the 10% that everybody else makes and the 30% that you can make, which would allow you to put that capital to work making 18%, 20%, 25% value-added returns for shareholders. Does that make sense?

Yes, it does make sense. Two good questions. I mean I'll touch on the rationale for the buyback and on capital and then I'll just ask April to talk about Stage 3 loans. I mean, look, we are a huge capital generation engine. From the capital bridge slide that April shared earlier, you can see a significant addition to CET1 through the profitability that we generated in the year. And of course, we look for opportunities in the market to deploy that capital in a number of ways. One of them is organic growth. But we don't want to organically grow for the sake of it. So we don't want to chase the cheapest lender down to the bottom of the barrel to put more volume through and consume more of that capital. And equally, we don't want to pray it up the risk curve to an environment where we're not comfortable with the risk/reward dynamics through the cycle in terms of the way in which we deploy that capital. So with a balance sheet of our size, I think we feel quite comfortable around that sort of organic origination, capital deployment, delivering that sort of 10% net loan book growth spread across our core segments of Buy-to-Let and Residential, but then, of course, some of our more cyclical segments that we're in, such as development finance and commercial and semicommercial, et cetera. And we choose to deploy that capital carefully. And you're right, if you normalize our CET1 ratio down to a more normalized ratio, if you like, that the ROE number looks pretty stellar. But then it always has since OSB has been a listed organization. And people say, well, how long will that continue? And funnily enough, it keeps continuing. I think though we've got a broad shareholder base. We know some shareholders are keen on yield. Some shareholders are keen on growth. We will keep some capital if we see inorganic opportunities. We have seen a few during the course of the last sort of 9, 12 months, but nothing that's met our sort of ROE hurdle. And we don't want to dilute those returns just for the sake of growth. And therefore, doing something to give some capital back to shareholders at the moment feels like the right response. April, I'll hand over to you.

But sorry, Andy, can I just come back quickly on that one?

Yes, sure. Go on.

I mean if I look back at the CCF acquisition, I seem to remember, one of the aspects of that was the automated systems they had, which I think at the time, you talked about allowing you to expand your market into some of the more vanilla areas of mortgage lending, which starts to then give you access to, I assume, a much bigger market than you have today or you had previously. Is that still something that you see opportunities for, I mean in terms of -- because I know in the traditional OSB model, you're always slightly limited because you had to manually underwrite everything and that gives you a certain sort of limited size. But now we've got the CCF model and you've got the automated processing, is that -- do you still see the opportunities to now expand that marketable -- that market you can go for sort of significantly? Is that still something we should look for?

Well, yes, I mean, look, we had Alan Cleary, who was our MD Mortgages, retired sort of tail end of last year, and we have a new MD Mortgages on board, John Hall. John is incredibly focused on leveraging that digital platform in Precise to increase our exposure on the residential side of the equation because there definitely is more in the slightly off high street resi market that is going to materialize over the next few years with things like knock-on impact of furlough and the odd sort of blip on people's credit file as a function of higher inflation. That will create further opportunity in that residential space. And John Hall is very, very keen to leverage that up. We sometimes look at businesses that are for sale that have got residential mortgage generation and book. And we think, well, there's not really any point because if we really want to go after that and the market opportunity is there, we've certainly got the technology to deploy in that area, which does enable you to sort of put more through the engine. So I think residential remains a focus for us. Again, it's all about the risk and reward dynamic. We don't want to pray too far up the risk curve, but we want to be positioned in a way where we're writing at higher margins than the high street, but without unnecessarily stressing the RWAs as we take that business on board. So that is a focus of ours over the next 12 months or so.

Great.

Shall I pick up the Stage 3 question? I assume you're looking at the charts on Slide 11 so for other people on the phone. Yes, there has been an increase.

Actually, well, I was just -- I was comparing it with the half year, but yes, I mean, that's from your announcement, but yes.

You can see that on that slide. Yes. I mean I think there's -- I don't think there's any huge underlying concern there. We have quite stringent requirements for people to exit Stage 3. So loans that have gone in take quite a lot of time to cure. We had a couple of loans exposures on the commercial side -- in the commercial subsegment, which we put into Stage 3 during the year. I think what's comforting, obviously, is if you look at the expected credit loss given our very sensible loan to values. That does rather dampen the impact. I think Andy mentioned very early doors that clearly, we worked very hard with a small cohort of borrowers who had taken multiple payment holidays and who required additional forbearance when those ended and that cohort has gone through the staging process. I think the good news is there were other cohorts, which partially offset that because they've performed better than expected. But I think a small cohort, something we obviously watch closely, we've got tremendous protection from our sensible loan to values. And I don't think there's a sort of a big underlying story here. There's also some natural seasoning of the younger CCFS book as well. But hopefully, that gives you a little bit of color.

Our next question is from James Invine from Societe Generale.

I just wanted to ask about the buyback, please. I mean it's really very welcome. But even net of that, your capital ratio is still looking strong. As Ed was saying, you're very profitable. You've got IRB on the horizon. So I realize there are a few uncertainties out there, but it still seems like you're keeping this capital ratio at a very conservative level. So I was just wondering why the buyback, as welcome as it is, wasn't actually a bit larger?

I can -- do you want me to start for that one, Andy?

Yes. Yes, please.

Yes. Obviously, it's our inaugural buyback. But we have to size it based on how much we think we can repurchase within the rules within a sort of 8- to 12-month period. And it's really just based on the average daily trading volumes of our stock. So that's how it was sized. And there's a limit. We've set ourselves below that limit as the first time we've done it. We're obviously not doing it ourselves. We've engaged an investment bank to execute it for us. So that was how we sized it. I think really, I guess it's about that clarity in particular on how the U.K. will adopt Basel 3.1 for buy-to-let. And as a very large buy-to-let lender, the degree of national discretion that the PRA has is extraordinarily broad. And therefore, the range of potential outcomes on our risk-weighted assets is incredibly broad. So we have to run the organization with enough capital to withstand a very remote, at this stage I think, but it's a possible worst-case scenario where all buy-to-let is effectively risk-weighted as more of a commercial concern. We don't think that's where we're going to end up. But until we know for sure, we do have to maintain that capital for that circumstance. But I do expect to get that clarity by the end of the year. I think the PRA have said the second half of this year. I think the mood music I'm hearing from sort of professional advisory community is that the most likely outcome is not a problem for us. But unfortunately, we have to run our capital to protect ourselves just in case that remote circumstance comes to light. But it won't be too long before hopefully, we can give you that clarity.

Fine. And can I just ask when you're pricing new business, what assumption are you making on the risk-weighted outcome?

Well, we run multiple scenarios, to be frank with you. I think our base case is that an element of Buy-to-Let is carved out and remains treated as residential, a slight increase for us as that's sort of our base case. And -- but clearly, we run lots of other capital scenarios as well when it comes to all of the potential range of outcomes on Basel 3.1 and of course, IRB as well based on our models. So the central scenario is what we use in pricing.

Our next question is from Ian Gordon from Investec.

Can I just have 3, please, mainly follow-ups? Just going back to the business originations, clearly, in 2021, volumes and growth was entirely dominated by Buy-to-Let within the CC -- within the Charter Court portfolio. I think you reduced originations across all other business lines. You've already talked about residential lending, but are you essentially saying it's too soon for you to materially increase your appetite in some of the other product lines, the specialist product lines rather than more vanilla forms of resi mortgages? Secondly, ECLs, I know it's a bit of a rounding error, but it's always a source of curiosity for me. Your assumptions, especially in terms of changes to your weightings for the reasons given strike me as materially more conservative than we've seen across the rest of the sector. You're now giving a fairly significant weighting to unemployment forecast in excess of 6%, which is conservative by any measure. Would you say that these were decisions taken in the light of very recent geopolitical events? Or are they -- do they represent what would have been your year-end position based on the inflationary pressures you could see at that time? And then thirdly, I won't push you again on the level of surplus capital you're carrying. I think we can all do the back-of-envelope maths and agree it's very substantial indeed. Clearly, I welcome the fact that you're not going to do any MREL issuance in 2022. But if you're continuing to sit on such large capital buffers when we get to Q1 2023, are you determined to go ahead with your inaugural MREL issuance at that time regardless? Or may you push it back if you're carrying so much CET1 anyway?

Thanks, Ian. I'll just talk about Buy-to-Let origination and opportunities in other markets, and then ask April to talk about the second 2 points. No, we don't think it is too soon. We are cautiously putting back on the shelf some criteria through our InterBay brand in things like semi-commercial, commercial and sort of developer exit and bridging, nonregulated bridging. So we are starting to put some criteria back on the shelf. I think it's fair to say we'll hold the leash tighter than it would have been pre pandemic just because there are events playing out. We've got a development finance business, but we've always kept that relatively small. We don't want developers who overcommit themselves and end up with lots of half-built units that aren't ready to take to market. So we are conservative in that respect. And our asset finance business through the InterBay brand grew quite well actually in 2021. We're happy with that business, and we're continuing to look for opportunities to deploy small amounts of capital in that. But again, I kind of come back to, I think we've described in the past, if you took a set of weighing scales and the pivot point in the middle, for us, Buy-to-Let is the big thing that everything sits on in the middle. That's the pivot point. That's the market we like, and we think the return dynamics are strong. On one side of the scales, therefore, is the residential market, and we like that market, but not all residential has the same kind of net interest margin and return as particularly things like the professional buy-to-let market. But we balance those weighing scales up with the more cyclical aspects of things like commercial bridging, asset finance, et cetera, on the other side of the scales to keep that overall return dynamic where we want it to be. So the short answer to the question is, we'll let the leash out a little bit and cautiously, but continue to monitor what goes on in the macro environment. And when I say things like commercial, clearly, it's not big retail premises, shopping centers, that kind of stuff, it's industrial units, a couple of flats above a shop, the kind of commercial that maintain good values even through the pandemic period. So hopefully, that answers that one. And I'll ask April to tackle the other 2 on ECL and surplus.

Sure. Happy to. So on the ECLs, I think -- well, firstly, the way we have to do this under the accounting rules is to look at the circumstances we were aware of at the end of the year. But there's always a fair range of acceptable approaches to take at that point. And when you have a worsening outlook subsequent to the year-end, you're sort of more minded to position yourself at the conservative end of appropriate positions, and we're only human. I'm sure that's what we did. But actually, we get the benefit of quite a lot of benchmarking data, including benchmarking data from the PRA. And when you compare ourselves with that downside weighting to other Tier 2 firms, we're kind of right sort of in the middle of the pack on unemployment. But actually, we are on the sort of more conservative end of the pack for HPI. And I think that's really where we've positioned ourselves throughout the pandemic. So no change there. So yes, I mean, I think that's kind of where we pitched it. Clearly, our auditors, I'm sure they're listening in, had some views as well and did a lot more benchmarking and challenging of that. And we use a range of economists. We used the range of scenarios provided. And I think what you will have seen is in the Tier 1 banks, it's more common practice perhaps to assess things like the rising cost of living as a post-model adjustment. We decided to put it through a downsized weighting. So I think you need to look at the overall picture as opposed to just look at economic scenarios or just look at PMAs because I'm pretty certain that this will have been picked up in PMAs, at least in the Tier 1 banks. So that's a little bit more color there. And I think you asked about sort of a number of different thoughts on the level of surplus capital and MREL issuance. I think we've got a couple of things going on here. I mean, you'll have seen with our AT1 issue that we are looking to optimize our capital stack. And we don't have any Tier 2 out of the holding company. So that's definitely something that we're looking at and looking at the markets when the time is right to do that. And because of the uncertainty about how much MREL we actually need, because of the uncertainty, I'm sorry to say it again, Basel 3.1, it may be that we might do Tier 2 first because we know we want to optimize the stack, and we wouldn't want to issue too much MREL before we kind of have a good sense about how much we need. But again, wanting to optimize the stack, and obviously, the pricing of these instruments is significantly below our cost of equity, I think I'd rather issue MREL than use CET1. But you're absolutely right. The timing of how you do that is something that we keep under strict sort of review. And that's partly the reason why I said earlier that we were now planning to not issue anything this year on the MREL side. So there's 2 dynamics there. Obviously, not wanting to get an unnecessary cost of carry for the coupons, but wanting to continue on, on the optimization journey and obviously hit the markets when they're conducive as well.

We have a question from John Cronin from Goodbody.

Just a few from me. Look, firstly, just to talk about the events in Eastern Europe and second order effects, I suppose, in terms of your expectations around any impact from a landlord confidence perspective or the transactional activity perspective would be welcome. Secondly, in relation to point around capital return and higher dividends. So clearly, welcome to the start of the comps and return process. But you mentioned the obvious limitations in terms of how far you can go on a buyback in any given period. Is that a constraint in the future to the effect -- to the extent that you've got the clarity you needed from the PRA on Basel 3.1? Or would you look at specials or other ways of rerouting all of that huge quantum of surplus capital back to shareholders? And within that question, I'd just like to ask, is the Board open-minded with respect to going further in terms of the payout ratio? So going further beyond 30% in the relative near term? And then finally, just on the IRB application. Look, can you give us any update in terms of when you expect to submit it now because it has been going on for some time? Clearly, I understand that you've taken the opportunity to just make sure everything is in order and reflecting the changed state of play. But when do you expect to actually submit it because it appears to be a pretty long process through to approval from what we've seen at other banks?

Thanks, John. I'll talk about landlord sentiment and sort of second order effects of what's going on currently as much as I can. And then I'll ask April to pick up the buybacks and the IRB question. I mean we do a lot of landlord sentiment surveying. And the last one we did was tail end of the year. And actually, it was a very positive picture. I think landlords felt, on the whole, their businesses had performed well through the pandemic with actually far fewer than you would expect experiencing issues with tenants not being able to pay rents, et cetera in that sort of quality end of the private rented sector. So I think landlords were feeling good about the year to come and expansion. Of course, whenever you get something which dominates the media and the sentiment of markets generally, like what's going on with Russia and Ukraine at the moment and how that, therefore, manifests itself with -- I mean we were already seeing inflationary pressures on fuel energy costs and supply chain issues. I think the situation will seek to exasperate that for a period of time. We will do further surveys towards the end of Q1 and see how people are feeling. But I have to just come back to one of the points I made earlier around the fundamentals. The private -- the demand for private rented property isn't shrinking in the U.K. because people are not suddenly getting out of bed and becoming owner-occupiers overnight. That transition to owner-occupation is much longer than historically it was many years ago. And it's the private rented sector that continues to provide accommodation across the spectrum, both for those looking for flexibility and, dare I say it, perhaps some increase in immigration that may start to come back to the U.K. again. Long term, those things are potentially good for the sector. So we'll continue to monitor sentiment, but there was certainly nothing wrong with it coming into the year. And I think landlords are a pretty savvy bunch and realize that you get the odd bump and they'll ride it along with everybody else. April on the buybacks and IRB?

Yes, of course. Well, you're absolutely right, John, that we are limited in the amount we can actually buy back each year, both from the approvals we have from our shareholders, but also the daily -- average daily trading volume. So the Board remains very open-minded and if it's special dividends, then it's special dividends, we wouldn't discount that. To be frank, we'd rather spend it. We continue to look for growth opportunities, both organic and inorganic. That clearly would be #1 choice given the returns that we're giving in our business. I think that we're picking up on a question that was asked earlier. And so we're sort of very open-minded as soon as we have that clarity as to the best way for our shareholders to return it, assuming that is, as we expect, an excess. And then I think you asked on when IRB. Difficult for me to give you a categorical answer because it's really up to the PRA. We're certainly actively talking to them about a landing slot. Just to be clear, though, there is a 6-month period of discussion with them before they then say, please put your application in, and we're waiting for the landing slot to really start that discussion in earnest. So then, of course, we have been talking to them about the project all the way through. And I previously said, look, we're aiming to be ready to submit at the end of last year. And I chose my language quite carefully, and I think explained at the time what I meant, because it really isn't up to us. All we can do is try and derisk our application as far as possible so that we have the smoothest ride through the process as possible. And that's why we took the decision to get ourselves into a compliant position before submitting. And previously, I think previous practice has been you submit before you're completely compliant. And as long as you think you're going to be compliant in a reasonable time frame, I don't know, 6-months plus. So it's just really a change in how we order our program, but very much up to the PRA to carve out the necessary resources to take our application through. And I'll keep you all updated as and when we get more information on that, but active discussions.

I will come back to one other question that I had on the openness -- the Board's openness to improving the payout ratio further in due course.

Oh, you mean the dividends. Well, I think we -- yes, we've done what we've done for 2021, and we were able to do that because of all the strong capital that we generated during the year and, of course, the excess that we came into the year with. But we haven't made any statements about what it might be going forward just because we want to wait for that clarity. So that's really all I can say at this stage. I hope it shows that we are minded to increase it when we are able to, but more really as soon as we get that clarity and that is expected before the end of the year. So I should be in a really good position. I know it sounds a long time to wait, but I should be in a really good position if the PRA do publish their consultation paper to give an update this time next year, which is when we would be announcing anything to do with our go-forward dividend policy would be at that stage.

Fair enough. Makes sense.

Thanks, John. Daisy, I've just come to the fact we're coming up to time. So I think we'll take one more if there is another question to be asked. And then if we didn't get to any of the questions, if people just pump them in through IR. we'll make sure you get answers to them. So Daisy, is there another question waiting for the last one?

We don't have any questions queued.

Perfect. In that case, that almost worked to bang on 10:30 like a dream. Thank you very much, everybody, for dialing in and look forward to speaking to you all soon. Cheers.

Yes. Thanks, everybody. Speak soon.